Monday, December 31, 2007

One indicator that I have yet to comment on in 2007 is the TRIN, also known as the Arms Index, after its inventor, Dick Arms.

The TRIN is calculated by first dividing the number of stocks that advanced in price by the number of stocks that declined in price to determine the Advance/Decline Ratio. Next, the volume of advancing stocks is divided by the volume of declining stocks to determine the Upside/Downside Ratio.Finally, the Advance/Decline Ratio is divided by the Upside/Downside Ratio.In mathematical terms, the TRIN looks like:

(Advancing Issues / Declining Issues)

────────────────────────────

(Advancing Volume / Declining Volume)

Like the VIX and put to call ratios, the TRIN is a contrarian sentiment indicator.Generally, a rising TRIN indicates increasing bearish sentiment and a falling TRIN reflects increasing bullish sentiment.I have included the traditional 1.2 and 0.8 thresholds as indicative of sentiment extremes.These are levels at which the probability of a market reversal increases.

Depending on their trading time frame, practitioners use different bars for the TRIN.In the chart below, I chose to use 60 minute bars over the course of a two month period to generate swing signals of the short to intermediate-term variety.For comparison purposes, day traders frequently use 5 or 10 minute bars.It is important to note that different length bars give very different signals and also usually require a rethinking of where one should place the threshold levels for market turns.

At the moment, the TRIN is generating a fairly bullish signal – certainly the most bullish signal since Thanksgiving, when the markets began a strong rally that surprised many who were not watching the TRIN closely.

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Purpose of this Blog

The intent of this blog is to educate, inform and entertain readers, while also serving as an archived learning laboratory of sorts as I try to sharpen my thinking in areas such as volatility, market sentiment, and technical analysis. I also enjoy charging off on tangents and hope that readers may find some illumination or at least amusement in these forays.

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About Me

Chief Investment Officer at Luby Asset Management LLC in Tiburon, California. Previously worked as a full-time trader/investor and also a business strategy consultant. Education includes a BA from Stanford and an MBA from Carnegie Mellon.
Useless trivia: I once broke the world pogo stick jumping record without knowing it.